Tag: Relief from Royalty method
Under the Relief from Royalty method value is determined by reference to the hypothetical royalty payments that would be saved through owning the asset. The method has been applied in situations where intangibles are sold to a group company in a low tax jurisdiction only to be used exclusively by the seller under a royalty/license arrangement. The method is particularly useful in these round trip tax avoidance arrangements to neutralize the effect of the arrangement. See TPG 9.61 and example 16 in the Annex to chapter VI.
A relief-from-royalty model will not capture the value of all of the rights of ownership, such as the right to determine when and where a mark may be used, or moving a mark into or out of product lines. Nor does it capture the economic benefit in excess of royalty payments that a licensee generally derives from using a mark. Ownership of a mark is more valuable than a license because ownership carries with it the unlimited right and incentive both to put the mark to it’s most valued use and to increase it’s value. A licensee cannot put the mark to uses beyond the temporal or other limitations of a license and has no incentive to take steps to increase the value of a mark where the increased value will be realized by the owner.
France vs SA SACLA, October 2022, Conseil d’État, Case No. 457695 (ECLI:FR:CECHS:2022:457695.20221027)
SA SACLA, which trades in protective clothing and footwear as well as small equipment, was subject of a tax audit covering the FY 2007, 2008 and 2009. In a proposed assessment issued in December 2011, the tax authorities increased its taxable income on the basis of Article 57 of the General Tax Code, by considering that SACLA, by selling, a set of brands/trademarks held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime, had carried out an indirect transfer of profits in the form of a reduction in the selling price. In a ruling of February 2020, the Lyon Administrative Court of Appeal, after dismissing the plea of irregularity in the judgment, decided that an expert would carry out an valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation should take into consideration an agreed exemption from payment of royalties for a period of five ... Read more
Poland vs “X-TM” sp. z o.o., March 2022, Administrative Court, SA/PO 1058/21
On 30 November 2012, X sold its trademarks to subsidiary C which in turn sold the trademarks to subsidiary D. X and D then entered into a trademark license agreement according to which X would pay license fees to D. These license fees were deducted by X in its 2013 tax return. The tax authorities claimed that X had understated its taxabel income as the license fees paid by X to D for the use of trademarks were not related to obtaining or securing a source of revenue. The decision stated that in the light of the principles of logic and experience, the actions taken by the taxpayer made no sense and were not aimed at achieving the revenue in question, but instead at generating costs artificially – only for tax purposes. An appeal was filed by X. Judgement of the Administrative Court The court set aside the assessment of the tax authorities and decided in favor of X. According ... Read more
TPG2022 Chapter VI Annex I example 16
54. Shuyona is the parent company of an MNE group. Shuyona is organised in and operates exclusively in Country X. The Shuyona group is involved in the production and sale of consumer goods. In order to maintain and, if possible, improve its market position, ongoing research is carried out by the Shuyona group to improve existing products and develop new products. The Shuyona group maintains two R&D centres, one operated by Shuyona in country X, and the other operated by Company S, a subsidiary of Shuyona, operating in country Y. The relationships between the Shuyona R&D centre and the Company S R&D centre are as described in Example 14. 55. In Year 1, Shuyona sells all rights to patents and other technology related intangibles, including rights to use those intangibles in ongoing research, to a new subsidiary, Company T, organised in country Z. Company T establishes a manufacturing facility in country Z and begins to supply products to members of ... Read more
TPG2022 Chapter IX paragraph 9.61
Where the business restructuring provides for a transfer of an intangible followed by a new arrangement whereby the transferor will continue to use the intangible transferred, the entirety of the commercial arrangement between the parties should be examined in order to accurately delineate the transaction. If an independent party were to transfer an asset that it intends to continue exploiting, it would be prudent for it to negotiate the conditions of such a future use (e.g. in a license agreement) concomitantly with the conditions of the transfer. In effect, there will generally be a relationship between the determination of an arm’s length compensation for the transfer, the determination of an arm’s length compensation for the post-restructuring transactions in relation to the transferred intangible, such as future licence fees that may be payable by the transferor to be able to continue using the asset, and the expected future profitability of the transferor from its future use of the asset. For instance, ... Read more
France vs SA SACLA, August 2021, CAA of Lyon, Case No. 17LY04170
SA SACLA, which trades in protective clothing and footwear, as well as small equipment, was the subject of an tax audit covering the FY 2007, 2008 and 2009. In a proposed assessment issued in December 2011, the tax authorities increased its taxable income, on the basis of Article 57 of the General Tax Code, by considering that SACLA, by selling, a set of brands held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime, had carried out an indirect transfer of profits in the context of a reduction in the selling price. In a ruling of February 2020, the Lyon Administrative Court of Appeal, after dismissing the plea of irregularity in the judgment, decided that an expert would carry out an valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation should take into consideration an agreed exemption from payment of royalties for a period of ... Read more
France vs SA Sacla, February 2020, CAA de Lyon, Case No. 17LY04170
SA Sacla, a French company trading in protective clothing and footwear, as well as small equipment, was audited for fiscal years 2007, 2008 and 2009. The French tax administration issued an assessment, considering that SA Sacla by selling brands owned by it for an amount of 90,000 euros to a Luxembourg company, Involvex, had indirectly transfered profits abroad. Due to inconclusive results of various valuations presented by the tax authorities and the taxpayer, an expert opinion was ordered by the Court on the question of whether the price of the brands sold by SA Sacla to the company Involvex had been at arm’s length. DECIDES: Article 1: Before ruling on the request of SA SACLA, an expert will carry out an assessment in order to determine whether the selling price of the brands sold by SA SACLA corresponds to their value, taking into account the exemption payment of royalties for a period of 5 years granted by the company Involvex ... Read more
Denmark vs H Group, April 2019, Tax Tribunal, Case No. SKM2019.207.LSR
Intangibles had been transferred from a Danish subsidiary to a US parent under a written agreement. According to the agreement the Danish subsidiary – which had developed and used it’s own intangibles – would now have to pay royalties for the use of trademarks, know-how and patents owned by the US parent. The tax authorities had issued an assesment on the grounds that the majority of the Danish company’s intangibles had been transferred to the US parent. In the assesment the value of the intangibles had been calculated based on the price paid when the US group acquired the shares in the Danish company. H Group argued that the transferred intangibles no longer carried any value and that the Danish company now used intangibles owned by the US group. The Tax Tribunal found that tax authorities had been entitled to make an assessment as the transaction had not been described in the Transfer pricing documentation. However, the Tribunal considered that the valuation ... Read more
Norway vs Normet Norway AS, March 2019, Borgarting Lagmannsrett, Case No 2017-202539
In January 2013 the Swiss company Normet International Ltd acquired all the shares in the Norwegian company Dynamic Rock Support AS (now Normet Norway AS) for a price of NOK 78 million. In February 2013 all intangibles in Dynamic Rock Support AS was transfered to Normet International Ltd for a total sum of NOK 3.666.140. The Norwegian tax authorities issued an assessment where the arm’s length value of the intangibles was set at NOK 58.2 million. The Court of Appeal upheld the tax assessment issued by the tax authorities and rejected the appeal. Click here for translation Norway vs Normet 190319 ... Read more
Report on the Application of Economic Valuation Techniques (2017)
The Study on the Application of Economic Valuation Techniques for Determining Transfer Prices of Cross Border Transactions between Members of Multinational Enterprise Groups in the EU provides an overview on how valuation techniques can practically and most efficiently be used for transfer pricing purposes in the EU, particularly for transactions involving intangibles. It investigates the differences between valuations for transfer pricing purposes and valuations for other purposes, and the state of play in terms of experience gathered by EU Member States and trade partners ... Read more
US vs. Amazon, March 2017, US Tax Court, Case No. 148 T.C. No 8
Amazon is an online retailer that sells products through Amazon.com and related websites. Amazon also sells third-party products for which it receives a commissions. In a series of transactions in 2005 and 2006, Amazon US transferred intangibles to Amazon Europe, a newly established European HQ placed in Luxembourg. A Cost Sharing Arrangement (“CSA”), whereby Amazon US and Amazon Europe agreed to share costs of further research, development, and marketing in proportion to the benefits A License Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Technology IP An Assignment Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Marketing IP and Customer Lists. For these transfers Amazon Europe was required to make an upfront buy-in payment and annual payments according to the cost sharing arrangement for ongoing developments of the intangibles. In the valuation, Amazon had considered the intangibles to have a lifetime of 6 to 20 years. On that basis, the buy-in payment for pre-existing ... Read more
Poland vs “H-trademark S.A.”, February 2012, Administrative Court, Case No I SA/Po 827/11
“H-trademark S.A.” applied for a ruling on the tax rules governing a business restructuring where trademarks were transferred to another group company and licensed back – whether Polish arm’s length provisions would apply to the transaction. The company was of the opinion that Polish arm’s length provision (article 11) would not apply, since the arrangement was covered by special Polish provisions related to financial leasing (article 17b-g). Judgement of the Court The Court found that the Polish arm’s length provisions applied to the transaction. Excerpts “In the present case, the legal problem boils down to the correct identification of the nature of the norms arising from Article 11 of the A.p.d.o.p. and its relationship with the provisions on leasing raised by the applicant (Articles 17b – 17g of the A.p.d.o.p.). Indeed, the applicant takes the view that the leasing provisions themselves introduce derogations from market conditions and that, consequently, it is not possible to examine certain activities governed by the ... Read more
US vs. DHL. April 2002, U.S. Court of Appeals
When DHL sold the “DHL” trademark to DHL International, the IRS disagreed with DHL’s evaluation of the arms-length price of the intellectual property and used its authority under Section 482 to reallocate income and impose penalties. DHL appealed the IRS ruling and the tax court upheld the IRS allocation to DHL. In this decision the U.S. Court of Appeals for the Ninth Circuit affirmed the tax court’s application of Section 482 to the sale of the trademark and the $100 million valuation for the intangible asset, but reversed the tax court’s rejection of a $50 million value of the foreign trademark rights, as asserted by DHL. DHL April 11 2002 United States Court of Appeals And the prior decision of the Tax Court US-vs.-DHL.TCM_.WPD ... Read more
US vs NESTLE HOLDINGS INC, July 1998, Court of Appeal, 2nd Circuit, Docket Nos 96-4158 and 96-4192
In this case, experts had utilized the relief-from-royalty method in the valuation of trademarks. On this method the Court noted: “In our view, the relief-from-royalty method necessarily undervalues trademarks. The fair market value of a trademark is the price a willing purchaser would have paid a willing seller to buy the mark…The relief-from-royalty model does not accurately estimate the value to a purchaser of a trademark. Royalty models are generally employed to estimate an infringer’s profit from its misuse of a patent or trademark… Resort to a royalty model may seem appropriate in such cases because it estimates fairly the cost of using a trademark… However, use of a royalty model in the case of a sale is not appropriate because it is the fair market value of a trademark, not the cost of its use, that is at issue. A relief-from-royalty model fails to capture the value of all of the rights of ownership, such as the power to ... Read more